The sixth package of EU-Russia sanctions: Implications for the maritime industry
- 27. June 2022
- Posted by: Marie-Theres Waldleben
- Categories: Commercial and Business Law, International Trade Law, Shipping and Transport Law
1. Commodity-related sanctions
With reference to our previous JusLetter and the particular topicality of the subject on the occasion of the G7 summit in Germany, we would like to present an overview of the further developments of the EU-Russia sanctions. Within the framework of the so-called sixth sanctions package, the EU has once again focused on areas of the maritime economy. The most spectacular and certainly most far-reaching measure of this sanctions package is the complete ban on the import of Russian oil by sea, i.e. by ship.
In the case of trade restrictions that relate to specific economic goods, the question of effective monitoring of compliance with such regulation quickly arises. Particularly in the case of an easily tradable commodity such as gold, it is important to consider how extensive the community of sanctioning states is in terms of the sales opportunities on the world market.
If one considers that an EU import volume for crude oil worth EUR 48 billion and refined petroleum products worth EUR 23 billion from Russia has been calculated for the year 2021 and that about nine tenths of this was transported by ship, it quickly becomes apparent that quite considerable amounts are at stake in the import ban on Russian oil. Such a decline in trade activities must have a clearly noticeable impact. Although this sanctions package comes into force with immediate effect, it is still permitted to process contracts that have already been concluded during a transitional period. It can therefore be assumed that the financial consequences of this sanctions package will not be felt for six to eight months. Should it not be possible for Russia to realise revenues through the delivery of gas either, only a change in its sales market will ensure the stability of one of its most important sources of income from the sale of natural resources. Although exemptions are foreseen for certain EU countries that can be reached by pipelines, these are less significant in terms of total import volumes.
2. Involvement of the insurance industry
As far as the shifting of sales markets is concerned, it should be pointed out that the sixth package of EU-Russia sanctions contains a very important additional provision. For, in accordance with the transitional period for the settlement of already agreed contracts, it will now be forbidden in less than half a year to insure shipments of oil from Russia, whether in the form of direct insurance or as a reinsurer. Insurance markets are difficult to change geographically. Insurers affected by sanctions have no vested interest in conducting business; they will try to enforce their interest in complying with the sanctions. It is therefore very obvious that insurers – based on the experience with the sanctions against Iran – will develop concepts that enable them to comply with their obligations under the sixth package of EU-Russia sanctions. In this context, attention will have to be paid to the design of insurance contracts in such a way that they provide for an automatic “cancellation” of the insurance relationship in the event of a violation of the sanctions. For shipping companies and firms involved in the oil trade, the possible violation of sanctions is thus accompanied by the considerable economic risk associated with the loss of cover under an insurance policy. Thus this regulation is to be regarded as particularly effective, because it is difficult to imagine how so much tonnage could be created in such a short time for which compliance with the EU-Russia sanctions would not be important. This effectively blocks access to sales markets outside the EU.
3. Operational challenges
As already mentioned in our previous Jusletter, special caution is required in any kind of “ship to ship” (STS) operations. This is because in the event that the origin of the crude oil or refined petroleum products from Russia can be proven, it will not be possible for the shipping company concerned simply to point to a longer chain of STS operations that may have made it difficult for it to determine the origin. Rather, shipping companies will have to be required to always prove precisely that oil transported on a ship is not of Russian origin. In the case of unclear origin, a restrictive approach should always be recommended. Not only the governmental measures, but also the loss of insurance cover represent a sharp sword of Damocles.
Based on the European Council Regulation (EU) 2022/879, it is also a requirement for insurers to ensure compliance with sanction regulations. In this context, it is not only a matter of designing the insurance contract vis-à-vis the policyholders or – in the case of P&I liability insurance – vis-à-vis the member shipping companies, but also of ensuring at the factual level that insurance of transports of Russian oil does not take place. The insurance companies, which are otherwise not directly responsible for operational transport activities, are thus involved at precisely this level through the regulations of the sixth package of EU-Russia sanctions.
For insurance companies, these regulations entail special compliance risks. This is because the operational business of the carriers they insure is not subject to the direct influence of an insurer. Mere notification obligations on the part of the carriers do not appear to offer sufficient protection from the perspective of the insurance industry.
It should be noted that the regulation also applies to indirect oil transactions for oil of Russian origin. An import via a third country, whether originally transported by sea or through pipelines, should thus be prevented. This can only be ensured through the strictest monitoring of supply chains in the transport of crude oil and refined petroleum products.
An insurer who wants to ensure compliance with the sanctions regulations therefore needs special control rights for this operational level. A general provision of insurance solutions for the transport of crude oil and refined petroleum products seems difficult to reconcile with this.
4. Possible concepts to ensure compliance
One conceivable concept would be to make insurance conditional on prior verification by the insurer. It should be borne in mind, however, that not only direct insurance business but also reinsurance is covered by the regulations. It is difficult to imagine how compliance with the sanctions regulations will be ensured without a considerable investment of time and personnel by all parties involved in the transport of crude oil and refined petroleum products, including insurers and reinsurers.
The fact that the sanctions are increasingly having an impact on the Russian side is also likely to become a significant factor. This increases the risks that prohibited circumvention transactions will be attempted. At the very least, it is not unlikely that Russian measures will be taken when sales figures decline.
To effectively prevent prohibited circumvention transactions and also to ensure that they do not happen unknowingly, compliance officers at carriers, insurers and reinsurers should direct their particular focus on sanctions compliance.
If you have any further questions, the contact persons at Ahlers & Vogel Rechtsanwälte will be happy to assist in this regard.